Greece
Another try
■ Midway through its third adjustment programme, for
which it has already received a little more than EUR 30 billion
out of a maximum of EUR 86 billion, Greece is seeking to
conclude negotiations on the bailout’s second review, which
would pave the way for the unblocking of a third tranche of
funding.
■ The Eurogroup meeting held earlier this week failed to
reach a political agreement. A solution will eventually be
found as each party makes concessions, although the size of
these efforts has yet to be determined.
■ The country is not threatened with a short-term liquidity
crisis. Even so, this latest episode reveals that even though
Greece’s economic parameters are relatively favourable,
from a political standpoint, it is never far from outbreaks of
stress and the dramatization of all that is at stake.
The Commission is confident
Composition of the fiscal balance, in % of GDP
−−−− headline balance, −−−− primary balance
▌primary structural balance, ▌cyclical contribution, ▌interests
8
4
0
-4
-8
-12
The 20 February Eurogroup meeting showed that Greece and its
creditors have not given up on the possibility of reaching an
agreement, even though they still failed to do so. Although teams
from the IMF and the European institutions will be returning to
Athens soon to pursue discussions, Eurogroup President Jeroen
Dijsselbloem was careful to point out that a “political agreement” had
not been reached between the different parties attending the meeting.
The goal is still to complete the bailout’s second review, which would
pave the way for the release of a new tranche of the bailout
programme.
The current bout of stress arises from a fundamental disagreement
between the Europeans and the IMF. The European Commission
has adopted a rather optimistic vision of Greece’s economic situation,
as illustrated by its winter economic outlook. EC departments
highlight Greece’s 2016 results, which were better than expected in
terms of GDP growth (+0.3%) and public finances (primary surplus of
more than 2% of GDP). The Commission is looking for a robust
recovery this year (+2.7%) and in 2018 (+3.1%). Under these
conditions, it should not be too hard for the country to meet its high
primary surplus targets (3.5% of GDP in 2018). European creditors,
especially Germany, are quick to use these observations to justify
postponing debt restructuring talks. As long as debt relief remains is
sight but is not achieved, the Greek authorities remain under
pressure. The creditors also hope to put off a very costly political
decision as long as possible.
It has been clear for months now that the IMF does not share in this
analysis. Although the latest economic statistics show a real but
fragile recovery1, IMF experts point out that one-off revenue made a
big contribution to the improvement in public finances. Looking
1
After only two consecutive quarters of positive GDP growth in the spring and
summer, growth slumped again last winter (-0.4% q/q in Q4).
economic-research.bnpparibas.com
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2001
2003
Chart 1
2005
2007
2009
2011
2013
2015
2017
Source: Ameco
beyond a short-term catching-up movement, Greece’s growth
potential is apparently not very high. Lastly, although they esteem
that the pension system is placing an excessive burden on the Greek
economy, in terms of fiscal policy, they do not think it would be
productive to try to obtain now more than the package of measures
already approved at the beginning of the programme. The IMF’s
position can be summarised as follows: “Greece cannot grow out of
its debt problem.” This implies that the solvency of the Greek state
depends on substantial debt relief provided by its European creditors
(ESM, EFSF)2.
There is nothing new about this fundamental disagreement. Three
solutions have been considered in recent months to break the
deadlock:
1. The European programme continues without the IMF, based
on the European institutions’ economic parameters. There are a lot
of arguments to support this position. The Washington-based IMF
has already lent Greece enormous sums by its own standards, and it
is not necessarily “begging” to increase its involvement. As to the
Europeans, the funding shortfall would be rather painless considering
the amounts at stake: press reports are talking about EUR 5 billion
that the IMF might lend to Greece as part of the third bailout package
of EUR 86 billion3. Moreover, some stakeholders are not particularly
2
For further information on the European Commission and IMF’s debt sustainability
analyses and their differences, see “Greece: missed opportunity”, Conjoncture, JulyAugust 2016, BNP Paribas.
3 Moreover, Greece used only about EUR 5 bn out of a total of EUR 15 bn in funds set
aside for the recapitalisation of banks in 2015. Generally speaking, it seems extremely
unlikely that the third bailout programme will reach its maximum amount.
Frédérique Cerisier
24 February 2017 – 17-08
4
in favour of the IMF’s implication in the bailout and adjustment
mechanisms for the eurozone countries. Considering the firepower of
the European Stability Mechanism, and the expertise of the
European Commission and the ECB, the Europeans should be able
to settle their affairs on their own, perfectly autonomously.
For all these reasons, we have long thought that this would be the
most probable outcome: the IMF would continue to provide technical
support to the Europeans without entering financially into the third
bailout programme. The withdrawal would be discreet as it would be
done simply by preserving the statu quo (the 3-year programme has
been proceeding without the IMF for the past 18 months). Yet it
seems we overlooked the tougher stances taken by several
European executives, foremost of which is Germany, who affirm that
their parliaments will no longer approve the bailout without the IMF’s
participation. This position is paradoxical since the IMF’s quasiforced participation would hardly strengthen the current programme’s
credibility in circumstances where fundamental disagreements are
patent between the IMF, who esteems that debt relief is essential
and urgent, and the German authorities, who find that the timing is
inopportune, and might not even be necessary.
Of the parties present at the meeting, it is in the interest of none to
see the situation deteriorate any further, or to replay summer 2015
events. In the end, an agreement will probably be reached. If each
party were to make concessions, the agreement could be a synthesis
of the three options outlined above, although the mix would still have
to be determined. From this perspective, it is worth noting that Alexis
Tsipras is undoubtedly in the weakest position5.
As to the timing, the Eurogroup president pointed out that even
though current delays were harming the country’s economic recovery
by eroding confidence (and risk fostering another build-up of
government arrears to the private sector), the country does not face
any major repayment dates before the second half of July, and is still
far from a liquidity crisis. The real urgency is much more political.
2. The IMF bends under European pressure. Since summer 2015,
very strong pressure is exerted through the media, which suggest the
IMF is the one that is always demanding more austerity during
bailout negotiations, and through the European representatives on
the IMF’s Executive Board4. This practice has its limits, however: a
press release earlier this month shows that the majority of Board
members support the positions of IMF staff. And this is before the
Trump administration appointed its Board representative. On the
whole, IMF teams have proven to be very resilient so far. If the IMF
ends up participating in the programme, it will only be after winning
some major concessions. For example, the Europeans might have to
agree to quantify future debt relief efforts, on condition, of course,
that the programme is successfully completed in 2018.
3. Under the third option, Greece would try to satisfy both the EC
and IMF. If push comes to shove, the IMF might agree to participate
in a plan in which debt sustainability is assured primarily by very high
fiscal surpluses (3.5% of GDP before interest charges, for several
years after 2018), rather than substantial debt relief by European
creditors. In this case, the IMF might ask the Greek authorities to
immediately enact measures designed to sustain the primary surplus
at high levels, by emphasising what it sees as the main weak points
of the country’s public finances: a deficit-ridden pension system and
an excessively narrow tax base. So far, Alexis Tspiras has refused to
consider reform legislation that would take effect after the European
programme closes. Yet a few statements made at the end of this
week’s Eurogroup meeting suggest that this idea is still on the table.
Christine Lagarde’s statements after meeting with Angela Merkel
mid-week also point in this direction. Although she is still very firm
about the need to allow the country to benefit from debt restructuring,
the IMF’s Managing Director said she is much more confident that an
agreement can be reached after seeing the progress the Greek
authorities have made towards satisfying the demands of its creditors.
5
4
France and Germany are permanent members.
economic-research.bnpparibas.com
He does not pose a real threat to current negotiations, especially since the latest
polls suggest that if early elections were held today, he would lose to the proEuropean, centre-right New Democracy movement.
Frédérique Cerisier
24 February 2017 – 17-08
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